In the eye of the financial storm

For a handful of ambitious and under-stretched Brussels journalists, The Economist’s launch of European Voice in Brussels 20 summers ago was a godsend – not unlike the splash made by POLITICO today.

Trade-press and newswire reporters who had spent days, nights and sometimes weekends covering currency devaluations, metals cartels or the latest attention-seeking MEP’s press release got to lift our heads and expand our contacts book. Best of all – and this really mattered back then kids – we got to write for an actual newspaper and, because it was a weekly and we were competing with real-time agencies and the dailies, we were scoop-hunters.

For me, the timing could not have been better. I was hired as European Voice’s economics correspondent just as it was dawning on the Germans that they had built insufficient fiscal safeguards into the economic and monetary union that was due to launch just three years later.

I realised early on that, even though the amount of copy we had to produce in the early days and budgetary constraints meant I was mostly glued to a desk in Brussels, the creation of this EMU meant contact-building in the national capitals. A small team and no bureaux abroad meant that beat was entirely mine.

Re-reading my cuttings from 1995-99, I would like to say I foresaw the euro crisis of 2010 onwards. In fact, I remember being more annoyed by the wretched lack of imagination that persuaded the 1995 Madrid summit to call the new currency “euro” than by the theological debate in Dublin two years later over what exact decimal point amounted to the “exceptional circumstances” that suspended the rules of the Stability and Growth Pact (SGP).

I may be doing others a disservice but the only policymaker I remember who warned consistently about the potential for crisis was Johnny Åkerholm, who took over from Mario Draghi as president of the Economic and Financial Committee in
2001 and is now chairman of the University of Vaasa.

He fretted that a combination of factors – the “Greenspan Put” and the markets’ search for yield, the credibility of the European Central Bank and the perception that the “no bail-out” Article 125 of the treaty would not apply in reality – was removing market discipline from governments, especially in the periphery.

Only tight and credible governance, he argued could compensate for this, but the politicisation of the SGP by France, Germany and Italy in 2002-03 had killed this off.

The eurozone’s halting response to the crisis has to be judged in the context of this thinking throughout northern Europe, but especially in Berlin. In part, the reluctance to take decisive steps to prevent systemic collapse has stemmed from German Chancellor Angela Merkel’s inherent political caution and Bundesbank President Jens Weidmann’s playing to the gallery at home. But underlying that is a strategy based on the sentiment that Germany – the Germany that argued and negotiated for a rigid rules-based “stability pact” in 1995-97 – was betrayed. Dripfeeding concessionary loans in return for a long-term re-design of EMU is not an accident but a plan.

It is easy to forget how much re-design has happened and how quickly. Crisis will do that. The fiscal governance structures are improved but, instead of removing politics from the process, they have shifted them from the Council to the Commission.

By contrast, the next time a crisis hits, it will not be like the improvisations of 2010-12. A capitalised European Stability Mechanism with a clear application and surveillance process is in place and, in the wake of the Greek, Irish and Cypriot crises, we now know who will lose what, and in what order.

Once the ECB’s quantitative easing programme is wound down, this more credible regime should re-appear in prices and restore the market discipline to eurozone members that was lost in its first decade.